Surveying Realty`s Hot Spots

Industrial Property Seen As Top Investor Choice

November 04, 1988|By Stanley Ziemba.

Industrial properties across the nation, especially warehouse-distribution facilities, are likely to be the top investment choice of real estate investors next year, according to a survey of 100 American and Japanese real estate investors, lenders and developers.

Retail properties also will continue to be a premier investment vehicle, followed by apartment buildings, single-family housing and offices, according to the survey, released this week by Chicago-based Real Estate Research Corp. The least popular investment vehicle is likely to be hotel properties, the survey found. Nevertheless, hotels, especially the all-suite and limited- service varieties, are likely to continue to be built at near-record rates, the report said.

``A mixed but still vital industrial market is seen for 1989,`` said Richard Kateley, executive vice president of Real Estate Research and author of the report. ``And Chicago, because of its central location, is probably the single best industrial market in the country.

``Moreover, some of the industrial development that`s occurring in the suburbs should begin spilling over into the city of Chicago. Throughout the country, central-city districts will re-emerge as viable locations.``

As for the office market nationally, Kateley`s report, entitled

``Emerging Trends in Real Estate, 1989`` and prepared for Equitable Real Estate Investment Management Inc., predicted a gradual decline in overall vacancy rates next year. However, the current oversupply of office space in the nation`s major office markets is likely to continue into the 1990s, the report said.

Construction of office space will continue to wane, and office rents, although up slightly in some of the tightening office markets, will remain flat over the coming year, the report predicted.

``Alarmingly large amounts of sublet space in most major office markets, highly maintained older buildings that will stay competitive with new Class A structures, and well-documented decreases in office employment growth will keep rents and yields down for longer than (office building) owners care to admit,`` the report stated.

Although retail properties will continue to attract investment dollars, the number of investment opportunities in large, regional shopping centers is limited, the report pointed out. Consequently, investors will concentrate on high-quality community and specialty shopping centers, it said.

But smaller centers are much riskier than regional centers, and their high prices don`t reflect a risk adjustment, the report said. ``The hoopla about how wonderful strips are is mostly special pleading by pension fund advisers and hype by the developers who built them,`` the report said.

The report also predicted that:

- The Japanese will continue to outspend other foreign investors for U.S. real estate in 1989, and they will continue to branch out to locations beyond major coastal cities.

- Fewer, smaller and less speculative projects will be developed next year.

- Real estate yields for the best properties will edge down, matching yields on corporate bonds more closely.

- Los Angeles, Washington and Boston will be the best prospects for real estate investment next year, while the worst cities will continue to be Houston, Denver and Dallas.

The report said that overall, the U.S. real estate industry faces a year of higher prices, fewer transactions and limited development opportunities in 1989.

As a result, ``1989 won`t be an exciting year for real estate, but it won`t be a disaster either,`` Kateley said.